How Are Industry Ratio Averages Found?

The judgment of a company's short-term debt repayment ability must be based on the average standards of the industry. Because different industries have different production and operation characteristics, assets and liabilities occupy different proportions, and current ratios and other indicators that reflect short-term debt serviceability will vary greatly. When the current ratio of some industries reaches 1, it can indicate that they have sufficient short-term solvency, and even if the current ratio of some industries reaches 2 or more, it does not necessarily indicate that they have strong solvency. For example, most of the retail industry based on cash sales can recover cash when the goods are sold, its accounts receivable and inventory are relatively small, and most of the current liabilities are caused by the credit purchase business. The ratio is very low. However, this does not mean that its solvency is not strong. Among the assets of the industrial manufacturing industry, because the inventory and accounts receivables occupy a large proportion, the scale of current assets is larger, and the current ratio will be higher. In view of this, the judgment of the strength of a company's short-term debt repayment ability must be based on the average standards of the industry.

Industry comparison

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Peer comparison analysis refers to the

The short-term solvency comparison process is as follows:

1. First, calculate the core index reflecting current short-term debt repayment ability-current ratio, compare the actual index value with the industry standard value, and draw a comparison conclusion, that is, the actual index value of the enterprise is better or worse than the same industry.

2. The purpose of decomposing current assets is to examine the quality of current ratios. As the main factor affecting the level of current ratio is the turnover of inventory and accounts receivable, the method adopted is to calculate the inventory turnover rate and the accounts receivable turnover rate respectively. And compared with the standard value of the same industry, it is concluded that the actual index value of the enterprise is better or worse than the same industry.

3. If the inventory turnover rate is low, you can further calculate the quick ratio and examine the level and quality of the quick ratio of the enterprise. And compared with the industry standard value, and concluded that the actual index value of the company is better than the same industry, or worse.

4. If the quick ratio is lower than the level of the same industry, it indicates that the receivable turnover is slow, and the cash ratio can be further calculated and compared with the industry standard value. It is concluded that the actual index value of the enterprise is better than the same industry, or worse. .

5. Finally, through the above comparison, comprehensively evaluate the short-term debt repayment ability of the enterprise.

The following uses the data of Enterprise A in 2000 as an example to illustrate the process of analysis and comparison. The actual index value of the enterprise and the standard value of the same industry are shown in Table 1:

index	Enterprise actual value	Industry standard value
Current ratio	1.59	1.67
Accounts receivable turnover	7.8	24.09
Inventory turnover	6	6.91
Quick ratio	1.06	1.15
Cash ratio	0.25	0.5

analyse as below:

1. Current ratio analysis. It can be seen from Table 1 that the actual value of the company's current ratio is lower than the industry standard value, indicating that the short-term debt-paying capacity of the company is less than the industry average, but the gap is not large. In order to further grasp the quality of the current ratio, the liquidity of current assets should be analyzed, mainly the liquidity of accounts receivable and inventory.

2. Liquidity analysis of accounts receivable and inventory. As can be seen from Table 1, the company's accounts receivable turnover rate and inventory turnover rate are both lower than industry standard values. This shows that the liquidity of the company's assets is lower than the industry standard value.

The preliminary conclusions are:

1. The inventory turnover rate is lower than the industry standard value, which indicates that the inventory appears to be too much relative to the sales volume, and the reason should be further analyzed. Internal analysts should continue to analyze raw materials, work in progress, and finished products, calculate their respective turnover rates, and compare with the same industry to find the main reasons for reducing the inventory turnover rate. Assume that there is a problem with the raw material inventory, and it should be further analyzed which raw material; if it is determined that it is a material A, it should be further analyzed which operation has a problem. For example: is the purchase cost too high or is the storage cost rising?

2. The turnover ratio of accounts receivable is significantly lower than the industry standard value, which indicates that this is the main reason why the enterprise's current ratio is lower than the industry standard value. The occupation of the company's accounts receivable is too high relative to sales revenue. Further analysis of the credit policies and ageing of accounts receivables adopted by enterprises should be made to see what went wrong.

3. Quick ratio analysis. Because the current assets used to calculate the current ratio contain poorly realizable inventory. Short-term creditors hope to obtain a ratio indicator on liquidity that is further than the current ratio. This indicator is called the quick ratio.

Quick ratio is the ratio of quick assets to current liabilities. The so-called quick assets are the amount of current assets after deducting the inventory. The connotation of the quick ratio is how many quick assets are for each yuan of current liabilities for protection. The higher this indicator, the stronger the company's ability to repay current liabilities. It is generally believed that every RMB 1 of current liabilities should be paid by RMB 1 of quick assets, that is, the standard value of the quick ratio should be 1. At this time, it indicates that the company has both good debt repayment ability and reasonable assets structure. The quick ratio of enterprise A is lower than the industry standard value, which indicates that the short-term debt repayment ability of the enterprise is lower than the industry average. Through the analysis of the previous step, it can be seen that it is mainly caused by the low turnover rate of accounts receivable.

4. Analysis of cash ratio. After analyzing the reasons for the low quick ratio, the cash ratio should be further calculated. Cash ratio is the ratio of cash assets to current liabilities. Cash assets refer to monetary funds and net short-term investments. The characteristics of these two assets are that they can be withdrawn at any time, or can be transferred and realized at any time. The cash ratio reflects the company's ability to realise immediately, that is, its ability to pay off debts at any time.

In assessing the realizing ability of a company, cash ratios are generally not important because it is impossible to require companies to use cash and short-term securities investments to pay off all current liabilities, and it is not necessary for an enterprise to always maintain sufficient cash and short-term securities investments to pay off debts. However, when it is found that there is a problem with the ability of the company's accounts receivable and inventory to be realized, the cash ratio becomes very important. Its role is to show how short-term solvency is at worst. Company A's cash ratio is only half of the industry standard value, indicating that the company's ability to pay short-term debt with cash is poor. However, the changes in cash asset stocks are large and sometimes do not explain the problem.

Through the above analysis, we can finally conclude that the short-term debt-paying capacity of enterprise A is lower than the industry average. The main problem lies in the accounts receivable, which is too large, which is the main contradiction. In-depth analysis should be focused on.